Blog : Marijuana Goes to the Polls

by Ed Zwirn on October 10th, 2014

In one of the few predictable scenarios to face the stock market these days, look for marijuana-related penny stocks of all caliber to gain notoriety in the coming weeks. This election, in one of the few matters actually left to the electorate to decide, will see voters in seven states, one U.S. territory and at least 17 cities and counties across the country face a marijuana initiative when they go to the polls in just over three weeks.

These November proposals range from legalizing recreational marijuana sales and use for adults in Oregon and Alaska to permitting it for medical purposes in Florida and Guam, to decriminalizing possession of small amounts in cities and counties in Maine, Michigan and New Mexico. Californians will decide whether to downgrade possession to a misdemeanor.

None of these initiatives, even if they are successful, will do anything to eliminate one hurdle to an orderly MJ industry growth: The weed is still illegal under Federal law, which classifies cannabis as a controlled substance with no medical uses. This makes MJ purveyors, medicinal users and recreational connoisseurs alike liable to federal prosecution, even if they live in a "legal" state. Businesses are also unable to deduct expenses for Federal income tax purposes.

But the November elections could prove a sea change for the MJ industry all the same. At the very least, a short-term bump is to be expected (if it hasn't already happened) for MJ-related stocks given the amusing stoner headline coverage that is likely to ramp up in all kinds of media over the coming weeks. Holders of these shares should pray that "journalists" don't run out of MJ-pun headlines any time soon.

But beyond the predictable flashes of interest in the weeks ahead, a couple of decisive victories for MJ referendums could well tip the scales in favor of an industry that, were it to go legitimate, would generate about $40 billion in annual revenues throughout the U.S. That's how much money, according to the latest (unreliable) estimates, Americans already spend on the stuff, legal or illegal, whether for recreational or medical purposes.

Of course, being an illegal, clandestine pursuit for over seven decades, marijuana use can only be guessed at. But the early evidence shows that legal pot use may prove to generate even more revenue than the illegal activity which predominates today.

Washington state's cannabis stores have been open only since July, but Colorado's have been in business since January. The crime rate is down and tax revenues are up in Colorado. Marijuana sales generated $10.8 million tax in revenue in the first four months - 50% more than anticipated.

As of the end of H1, after six months of legalization and 18 months of decriminalization, overall crime rates in Denver were down 10% and violent crimes were down more than 5%, according to the Drug Policy Alliance.

Colorado is expected to save $12 million to $40 million a year by reducing penalties, says the Colorado Center on Law and Policy. That state averaged more than 10,000 arrests and citations every year for possession of amounts that are now legal there.

Bolstering these alluring fiscal arguments is the fact that most Americans consider marijuana use to be no big deal. Public opinion polls have consistently shown a majority in favor of recreational use. The shocker, to me at least, came in July, when conservative icon Bill O' Reilly, himself a staunch opponent of legalization released an online poll which showed 89% of the more than 68,000 agreeing that MJ "should be legal, like alcohol." Significantly, not one of the 50 states on the O'Reilly map showed a majority opposed to legalization.

Arrayed against the apparent will of the people is a coalition of many parts. As one would expect, law enforcement interests and the prison sector have shelled out money in opposition. These are followed closely in donations to the anti-MJ cause by pharmaceutical companies and big liquor and tobacco. 

In upcoming installments of this investment blog, I will attempt to highlight what is at stake some of the key MJ electoral races (and maybe inject some historical perspective). Whether Floridians can get stoned by prescription or Oregonians can puff up for recreational purposes may not impact you directly as a consumer. But the stakes for investors from all jurisdictions are high. Start-up companies of all quality levels are set to rise and fall, as a wildcat industry starts up with rapidity. This volatility (which may be hardly noticeable in any case in the current market) poses its risks, and as Peter Leeds has pointed out, most of these stocks may be shaky stuff. The results of the votes in November may be far from assured, but that may be what makes them valuable.